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Business Risk

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Business Risk

Introduction

The insurance company provides financial services to its individual and institutional clients. In its operations, the organization is at risk of failing to meet claims. Trading of its stock was stopped in the security market by regulators. The focus of this study is the methods that will be used in assessment of risk. The bases of assessment will be presented and inherent risks though few in the organization will also be presented. The focus will be on these areas of study in HIH Insurance Limited

Risk assessment

According to Aven (2012), firms are faced with business risks in their operations. Before an organization can mitigate risks in its operations and from the external environment, it needs to identify these risks first and the impact they have on its operations. In an organization, risks occur in different forms. It is thus important for an organization to analyses risks that are associated with its form of business. These risks are found in the organizations internal environment as well as from its external environment.

In this case, the external risks that the organization is facing include the risk emanating from its aviation and marine business. There has been rise in the loss of planes including the Malaysian one in the past few years. The marine environment is also very risky and firms in the industry can incur risks within a very short time in such an industry. The organization is also faced with huge claims from the workers. This significantly increases its risk of doing business (Reuvid, 2012).

In regards to external risks, the organization incurred huge losses as a result of the 2009 typhoon. As a result of the takeover of FIA, the organization ended up incurring 100 million dollars in losses. This indicates the high magnitude of the risks that the organization is exposed. The halting of the sale of the organization’s stock by ASIC was also a huge risk and blow to the operations of the organization. It led to the loss of the value of the stock in the stock market. Moreover, the sentencing of the organization’s chief executive officer Ray William was also a major blow to the operations of the organization (Sadgrove, 2015). In summary, risk assessment focuses on both the external and the internal environment risks. The risks are rated depending on the magnitude of their impact in the operations of the organization (Rees, 2015).

Inherent risk

According to Cox (2014), inherent risks are multiple risks that can be traced from the financial report of the organization which are likely to increase the level of inherent risk to the organization. Inherent risks are those risks that arise from omission or error resulting to the failure of controls in the organization. This mainly occurs in areas where firms have high level of discretion such as management estimates in financial reporting according to (Morden , 2011). In this case, the inherent risk includes the sentencing of the former organization’s chief executive officer who was charged five billion for malpractices. According to Morden (2011), such malpractices had the potential of resulting to the collapse of the organization.

The organization also reported $100 million in losses. This was a huge cost to its operations and sustainability. It reduced the overall level of profitability reported by the accounting entity. The effects will be even higher when it is realized that some of the causes of the losses in the organization was as a result of the reckless behavior of management that ended up minimizing shareholders wealth as opposed to maximizing shareholders wealth. From the market, the halting of the organization’s operations and the stoppage of trading of its shares in the market also reduced the chances of success to the organization.

From the presented case, it is reported that the firm’s directors were not honest in financial reporting. This is a big inherent risk that creates ground for misuse of financial resources that are entrusted to directors by the shareholders. This has reduced the sustainability of the organization in the market, catalyzing its collapse (Duke, 2014).

Conclusion

From this presentation, it is clear that risks may hinder the success of the organization in the market. There are diverse forms of risk and hence, firms can identify the level of risks that are related to the type of their business. It is through proper identification of risks that an organization is in a position to mitigate them. By identifying these challenges and developing mechanisms of eliminating or reducing their effect on the operations of the organization, the organization profitability and sustainability is enhanced

References

Aven, T. (2012). Foundations of risk analysis. Hoboken, N.J: Wiley.

Cox, L. A. (2014). Breakthroughs in decision science and risk analysis. Hoboken, N.J: Wiley.

Duke, E. L. (2014). Terrorism risk insurance act: Analyses of data, market, and program issues. Hoboken, N.J: Wiley.

Morden, T. (2011). A short guide to equality risk. Farnham, England: Gower.

Rees, M. (2015). Business risk and simulation modelling in practice: Using Excel, VBA and @RISK. Hoboken, N.J: Wiley.

Reuvid, J. (2012). Managing business risk: A practical guide to protecting your business. London: Kogan Page.

Sadgrove, K. (2015). The complete guide to business risk management. Hoboken, N.J: Wiley.